An Economic Symbol, But Also a Political One
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An Economic Symbol, But Also a Political One

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Daniel González By Daniel González | Senior Writer - Tue, 01/21/2020 - 20:46

The country's geopolitical and economic relationships depend to a great extent on the plans that the president has for the NOC. When Enrique Peña Nieto’s administration approved the Energy Reform in 2013, Mexico broke with a tradition that had marked its economic performance during the 20th century. Oil, a national pride for decades, ceased to be the exclusive property of the state while the doors were opened to the privatization of a strategic industrial sector for Mexico. For decades, PEMEX had been not only an economic engine but also a political symbol, as well as the country’s most important company – there were times in the 20th century when PEMEX represented 40 percent of the Ministry of Finance’s income. But the NOC was unable to meet the technological challenge posed by the country’s proven reserves. That is to say, if Mexico wanted to continue being an important oil producer, it needed the arrival of private operators, local and international, to help reverse the country’s declining trend in oil production.

The Energy Reform, postponed several times, was finally approved by the Senate on Dec. 11, 2013. Five years later, on Dec. 1, 2018, López Obrador was sworn in as the new president of Mexico, initiating a new relationship between the state, PEMEX and the citizenry that is rooted in the Energy Reform promoted in 1938 by President Lázaro Cárdenas, one of López Obrador's great political idols. It may seem like a coincidence, but December 2018 marked 80 years since President Lázaro Cárdenas promoted Mexico's first Energy Reform with the approval of the Constitution in 1927. That Constitution, in its Article 27, gave the nation “absolute property over all the riches of the subsoil.”

It is precisely this article on which López Obrador based a good part of his presidential campaign. The founder of the political party MORENA, the party that took him to the Silla del Águila, showed himself, from the beginning of his campaign, to be against the reform that was passed with the approval of the country’s main political parties, repeating mantras that with the passage of time would become anchored in his political approach. “I am absolutely convinced that to privatize oil, to reform Article 27, is to betray the homeland. We have to call a spade a spade,” said López Obrador shortly after the approval of the reform; an analysis he repeated during the electoral campaign and which, according to various analysts, helped the politician reach Los Pinos.

The Fourth Transformation, a political program aimed at changing the economic and social model that had worked in Mexico for decades, could only function with PEMEX as the main axis of change. As the government of Mexico announced on its website, the Fourth Transformation established as its main objectives “to guarantee the supply of fuels and electric energy to the Mexican population with national production, through the strengthening and rescue of the productive enterprises of the state, PEMEX and CFE, so they can once again operate as levers of national development.” 

Three fundamental goals arise under these approaches: the recovery of national sovereignty, ensuring energy security and the redistribution of the country’s wealth. For López Obrador, these transformations would be impossible without a reinforced and renewed PEMEX. In other words, after López Obrador’s first minute in office, it became clear that the Fourth Transformation would be impossible without PEMEX, for symbolic and for social and economic reasons. However, PEMEX was not at that time a completely healthy company. According to PEMEX, the company accumulated US$99.6 billion in debt. According to Octavio Romero, General Director of PEMEX, this economic mismatch had its origin in the fall in oil extraction that began in 2014, with the Energy Reform of Peña Nieto already approved, and in the reduction of fiscal resources for exploration carried out by the same administration, resources that were destined to seismic and drilling studies. 

PEMEX, according to CNH, was experiencing its worst production crisis in 40 years at the beginning of 2019, while the success or failure of the six-year term presided over by López Obrador depended on the government’s plans for the state-owned company. The bureaucratic and political machinery of the new government then began to walk with the objective of providing the company with the necessary budget for its relaunch. Thus, part of the budget cuts and the money recovered as a consequence of the fight against corruption were transferred to PEMEX. 

This was an economic impulse that, according to the rating agency Fitch, was insufficient. In addition, the government said that no new bidding rounds would be convened until the contracts signed by private operators show results, since, according to the president, “there is no investment and they are not producing.”

Another of López Obrador’s main objectives is to achieve energy security in three years, leading to a “recovery of sovereignty,” a slogan that has accompanied the PEMEX logo since López Obrador came to power. To achieve his sovereignty goal, the president needs the six existing refineries to be capable of refining heavy crude oil, which is the most produced in the country, as well as the construction of a modern refinery in Dos Bocas, which has become the main public investment project of his administration. Dos Bocas and the other six refineries will have the task of refining the 2.6MMb/d that the federal government is planning for the year 2024. If successful, the production goal will allow the country to recover the sovereignty and energy security that López Obrador promised during his electoral campaign. “It was a good decision to build the refinery here, just as it is a good decision to invest in PEMEX,” López Obrador said in December 2019 about Dos Bocas. “We can say that oil production is no longer falling and that more is being produced,” he said.

According to the calculations of the government presided over by López Obrador, Dos Bocas will avoid the import of energy resources, which in turn will always result, according to his plans, in the political and economic independence that the new president is seeking for Mexico. In other words, López Obrador’s goal is to return to the most successful moments in the history of PEMEX, when the company contributed almost 40 percent of the resources of the Ministry of Finance, allowing the important economic development that Mexico experienced during the second half of the 20th century. The president has put all his cards on the PEMEX table and has done so with social support rarely seen in the country’s history. 

Now is the time to demonstrate to international markets, rating agencies and citizens that his plans for the country are viable. Shortly after taking office, López Obrador announced that at the end of his six-year term there will be an accumulated GDP growth of 4 percent, an impossible achievement without an increase in energy generation.

After López Obrador’s first year as president, the changes implemented in PEMEX have not meant a change in the country’s economic projections, despite the advances that, according to the government, have taken place in the so-called rescue of the hydrocarbons sector. “Progress has been made in guaranteeing energy security, as a necessary condition for national sovereignty, through the sustainable use of our energy resources, an increase in the national content of hydrocarbons and electricity, and the orderly and accelerated progress of the energy transition. It is proposed to achieve self-sufficiency in fuels by 2024, through an increase in crude oil production, the rehabilitation of the six PEMEX refineries and the construction of one more in Tabasco, with a capacity of 340Mb/d, as well as the largest electricity generation,” the government published on its website.

The reality, however, is that the country closed 2019 without GDP growth, while publications such as Forbes projected a period of economic recession for 2020 in Mexico, Brazil and Argentina, the three major economies of Latin America. To these pessimistic forecasts must be added the international socio-political situation, dominated by the foreseeable exit of the UK from the EU, the open commercial war between the US and economic and military powers such as China, and the 2020 US presidential elections. All of these situations could have direct consequences on the day-today running of the current administration, especially in an industry as globalized as oil and gas.

Back To The Future? PEMEX’s New Slogan

The change of PEMEX’s slogan was both a symbolic and political act that offered more proof, if any was needed, that the national energy vision of President Andrés Manuel López Obrador would be very different to that of his predecessor. The new slogan, Por el Rescate de la Soberanía (For the Recovery of Sovereignty) referenced not only President López Obrador’s rule-defining mission to support the renaissance of the heavily indebted national oil company but also the nation’s sovereignty, waived with the signing of the Energy Reform, to the sole ownership of the resources within its territory. 

PEMEX was created in 1938 by Lázaro Cárdenas and has long been a symbol of national pride to the country. Moments like the Cantarell field discovery in 1976 would place Mexico comfortably within the world’s top five oil producing nations and ensure that the NOC was a reliable source of income even during periods of economic hardship. For many years, PEMEX was not simply a productive apparatus of the state but also an emblem of prosperity and possibility. Yet poor management of the company’s finances and a failure to adequately replace reserves led to the necessary entry of private business into Mexico’s oil and gas industry in 2014.

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